The hospitality industry is enjoying its longest expansion and healthiest growth in a generation, yet some troubling trends are beginning to surface that threaten profitability and overall performance.
One of these trends is related to net room revenue – that is, revenue that remains with the hotel after accounting for distribution costs (online and traditional agency commissions and other expenses).
Net room revenue has been declining steadily over the past several years. For instance, US hotels earned roughly $155.2 billion in guest-paid revenue in 2017 but paid an estimated $25.2 billion to acquire guests in the form of OTA commissions and other distribution costs, retaining significantly lower net room revenue of $130 billion (Kalibri Labs).
The overall growth in occupancy and revenue per available room (RevPAR) that many hoteliers have been enjoying for some time now cannot possibly compensate for ‘the loss of wealth’ through steadily increasing OTA distribution costs. Obviously, hoteliers need to increase direct bookings, which come at a much lower cost, and improve the overall direct vs OTA distribution ratio.
Integrated strategy: The missing piece of the puzzle
One of the main reasons for the troubling trend of decreased revenue capture and profitability, despite stellar economic performance is the lack of integration, coordination, and singular focus and purpose among the core revenue generation teams at the property or hotel management company: namely, the revenue management (RM), sales and marketing (S&M), marketing, and customer relationship management (CRM) teams.
Quite often these teams function in a rather disjointed fashion, leading to missed revenue opportunities, over-dependency on the OTAs, alienated loyalty members, and lower profitability.
Often the RM, S&M and CRM teams in a property operate in isolation from one another, without close coordination. In some cases, they even compete with one another to sell the same rooms. In other words, the left hand – one team – does not know what the right hand – the other teams – is doing, to the detriment of marketing efficiency and price integrity, and ultimately overall revenue generation, profitability, and the owner’s return on investment (ROI).
The reality: highly fragmented hospitality
Traditionally, RM, S&M and CRM operate as separate teams with their own goals, technology tools, databases, vendors, and more.
One glaring example of this highly fragmented approach is keeping past guest engagement efforts (CRM) in a silo from new customer acquisition and marketing efforts.
For example, looking at independent hotels, less than a third of hotel guests on any given night are repeat guests, while two-thirds are first-time guests.
This means that the reality general managers and directors of sales and marketing (DOSMs) face every day is having to fill about 70 percent of their rooms on any given night with brand new guests that they know very little about, while trying to ensure they have a pleasant and meaningful stay.
Furthermore, once the property has acquired these new guests, when they walk out the door, if they’re not engaged with marketing automation and guest retention initiatives, there is no guarantee they will ever stay at the property again. This results in a vicious cycle that affects the bottom line.
Dr. Cindy Heo, an associate professor of revenue management at Ecole hôtelière de Lausanne (EHL), describes the current siloed approach in revenue management and the existing fragmented customer data situation in the industry:
Revenue management used to focus primarily on setting room prices and optimizing room inventory. Revenue managers should not just crunch RMS numbers but need to understand guests’ selection behavior, consumer psychology, and their competitors’ strategies by analyzing various pieces of information. RMS cannot, therefore, be the only toolkit for a revenue manager, because customer data reside in different hotel systems.
Tying RM, S&M and CRM together with a 360-degree approach that engages, retains, and acquires guests throughout the customer journey is not only more efficient and more effective at driving direct bookings, but it is critical in growing the bond with your customers and their lifetime value.
Obviously there is a need to break down silos
Today’s travel consumer’s hotel planning and booking journey has become increasingly complex in this multi-device, multi-channel, and multi-touch point digital landscape.
As consumers remain digitally-connected throughout these micro-moments before making a booking, each touchpoint presents an opportunity for a hotel to build a brand connection, influence intent, win the booking, and be there for every step of the journey.
In light of this complex digital landscape, hotel marketers should engage online travel consumers throughout their complex digital journey and can no longer afford to have a fragmented customer engagement and acquisition approach.
To summarize, here are the main reasons prompting the convergence of RM, SM and CRM into one cohesive team:
The overwhelming shift to online distribution and online customer engagements
Exploding mobile channels and the need for lightning-fast pricing and marketing decisions
The ever-increasing complexity of the customer lifecycle and the emergence of the digitally-savvy travel consumer.
The need to lessen overdependence on the OTAs.
The solution: The integrated revenue generation team
There should be a single-minded team at the property: the revenue generation team, consisting of RM, S&M and CRM specialists working together to acquire, engage, and retain guests; optimize performance; and increase revenues, especially direct bookings.
What then should hoteliers do to accelerate the switch to an integrated revenue generation team? Here are just a few of the changes and action steps needed:
#1 - Hotel management and franchise contracts:
Management and franchise contracts should use total gross operating profit (after OTA commissions, traditional agency commissions, and other distribution expenses) and not gross room revenues to calculate management and franchise fees.
In this way, every revenue-generating employee and team at the property would be evaluated based on net room revenues collected by the property (gross room revenue minus agency/OTA commissions).
#2 - Organizational changes:
A new role is needed at the property or hotel management company: that of revenue officer or revenue optimization officer, overseeing the integrated revenue generation department at the property, small or midsize chain, or hotel management company. The revenue optimization officer is not an accounting or finance major position, but a role for a cross-functional leader, versed in all three disciplines: RM, S&M and CRM.
#3 - Education and professional development:
The whole hospitality educational and professional development system needs to be re-thought and adjusted to create cross-functional experts who are intimately familiar with all three disciplines: RM, S&M and CRM. Existing RM, S&M and CRM employees should be incentivized to get certifications and attend professional development courses in the other disciplines as a prerequisite for their career advancement.
#4 - Technology investments:
Hotels need to invest in technology that allows alignment of, and cooperation among, the RM, S&M and CRM specialists from the revenue generation team. This is a call to action for the hotel tech community: new technology tools and platforms, especially platforms utilizing AI to crunch big data, are urgently needed to enable the cross-functional, cross-data alignment among RM, S&M and CRM.
The independent property, small or mid-size hotel brand can start small by working with existing vendors on cross-functional connectivity, or when considering new technology solutions, to evaluate the cross-functional capabilities of the vendors. Hoteliers should ask themselves, “How can we incorporate our digital marketing and CRM data into our pricing decisions? How can we use revenue management analytics to sharpen the focus and ROI of our digital marketing campaigns? How can we utilize our knowledge from our RFM data into our new guest acquisition efforts?”
#5 - Revenue optimization ideation
The revenue generation team and its RM, SM and CRM specialists, under the guidance of the revenue officer, should map out an annual revenue strategy, outlining major markets that need focus or improvement, sales, and marketing (seasonal, multichannel, ad hoc) campaigns needed to achieve the revenue goals, etc.
Each quarter, the team should brainstorm and come up with an updated action plan for the next three quarters. Every week the team should meet to discuss current property performance – including occupancy, ADR (average daily rate), RevPAR, and revenue needs – and set out concrete tactics to optimize revenue.
#6 - Optimization of the marketing mix:
An integrated revenue generation team can finally achieve the elusive optimization of the property’s marketing mix of price, product, promotion, and place. Only by working together can the team devise the optimum pricing, product offering, and distribution channel strategy that can bring the best results.
There should be collaboration when answering questions such as: should we offer the spring multi-channel marketing promotion to the OTAs? How do we tackle next month’s occupancy needs due to group cancelation? How do we improve weekend occupancy? Through this collaboration, action plans can be implemented across all revenue-generating channels.
#7 - Personalization:
Personalization is not only proven to increase bookings and other key performance indicators, consumers now expect hotel offerings, pricing, and content (textual and visual) to be personalized to their needs and preferences. A recent survey by eMarketer showed that 85 percent of internet users expect personalization, and 75 percent of consumers get frustrated when it’s clear that companies are not personalizing content (Janrain).
The revenue generation team can devise a robust personalization strategy that includes all aspects of the guest journey: from marketing and website engagements, pricing and channel management, personalized offering and pricing based on RFM and customer lifetime or LTV values, to product offerings and CRM retention and loyalty marketing initiatives.
#8 - Multi-channel marketing
The revenue generation team should coordinate marketing efforts using a multi-channel marketing approach. With one cohesive marketing campaign, and the same cohesive marketing message (read: promotion) pushed across all potential touch points with online travel consumers (hotel website, SEO, SEM, GDN and online media, social media, PR and email marketing), hoteliers can build stickiness and traction across channels and devices and dramatically increase revenue.
Today’s complex multi-touch consumer behavior is what makes multi-channel marketing campaigns the most effective way to address concrete business needs, increase reach, and boost bookings and revenue for the slow season or need period.
These campaigns can be structured around the property’s seasonality as well as specific business-needs (i.e., need to fill weekdays vs. weekends, occupancy needs, group cancelations, seasonal slowdowns, etc.), and also target specific high-value segments.
There is no doubt that today’s complex travel customer journey requires an integrated strategy to engage, acquire, service, and retain travel consumers across multiple digital touch points and across all digital channels and devices. This necessitates a single-minded team at the property: the revenue generation team, consisting of the RM, S&M and CRM specialists, working together to acquire, engage, and retain guests; optimize performance; and increase revenue, especially direct bookings.
There are no perfect solutions in existence today, therefore hoteliers should start with contractual and organizational changes, with close collaboration and alignment of business objectives and marketing plans across revenue generation teams, as well as make use of cross-functional technology solutions available today and invest in new and emerging solutions as they become available.
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